Independent Penalty Proceedings under Section 122 of CGST Act: Jurisdiction, Procedure and Constitutional Concerns

1. Overview

The Goods and Services Tax regime is built as a complete fiscal code where:

  • some provisions create the tax and penalty liability (substantive provisions),
  • some provide machinery for determination and recovery (adjudicatory provisions), and
  • the Rules and notifications operate as delegated legislation to give effect to the Act.

Penalties under the CGST Act, 2017, particularly those contained in Section 122 to Section 125, are being invoked with increasing frequency. However, a core legal controversy persists:

  • Does Section 122 itself contain the authority and machinery for initiating and adjudicating penalty proceedings?
  • Or is it merely a provision prescribing the nature of contraventions and quantum of penalty, which must be worked out only through other express adjudicatory provisions such as Section 73, Section 74, or Section 127?

This analysis critically evaluates the legality of standalone proceedings under Section 122 of the CGST Act, 2017, in light of:

  • the scheme of the Act,
  • Rule 142 of the CGST Rules, 2017,
  • key judicial pronouncements, and
  • subsequent administrative circulars.

The focus is on whether the statute itself contemplates Section 122 as an independent proceeding section, or whether it operates only consequentially in the course of other properly instituted proceedings.

2. Statutory Setting: Relationship Between Act and Rules

2.1 Rule-Making Power under Section 164(1)

Section 164(1) of the CGST Act, 2017 authorises the Government, on the recommendation of the GST Council, to frame rules “for carrying out the provisions of this Act”.

This power is delegated and is therefore subject to well-established constitutional limits:

  • Rules cannot override or dilute the substantive provisions of the parent Act.
  • Delegated legislation cannot create new substantive obligations or fresh jurisdiction that the Act itself does not contemplate.
  • If there is any inconsistency between a statutory provision and a rule, the Act prevails.

Accordingly, if any rule is interpreted as conferring adjudicatory power where the Act does not, such interpretation would be vulnerable on the ground of excessive delegation or inconsistency with the parent statute.

2.2 Role of Delegated Legislation in Penalty Imposition

Delegated legislation can regulate:

  • the form of notices,
  • electronic modes of communication,
  • timelines, and
  • procedural facilitation.

However, the authority to impose a penalty, identify the adjudicating authority, and prescribe the mechanism for initiation and determination must flow directly from the CGST Act, not from the Rules.

This distinction becomes crucial when analysing Rule 142 of the CGST Rules in the context of Section 122.

3. Rule 142 of CGST Rules – Procedure or Source of Power?

3.1 Textual Role of Rule 142

Rule 142(1)(a) mandates that the Proper Officer shall electronically serve a summary of notice in FORM GST DRC-01 for notices issued, inter alia, under Sections 122 to 125.

Rule 142(5) requires that a summary of the order be uploaded in FORM GST DRC-07 for orders passed under various sections, including Section 122.

On the face of it, Rule 142 appears to be purely procedural – dealing only with the mode and manner of issuing and communicating notices and orders. However, the reference to notices “issued under Section 122” has given rise to an interpretational issue:

Does Rule 142 merely assume that the Act already provides an independent adjudicatory framework under Section 122, or is it being used in practice to create such a framework where none exists in the Act?

3.2 Judicial View in Mahavir Enterprise

In Mahavir Enterprise vs. Assistant Commissioner of State Tax [2020] 117 taxmann.com 471 (Gujarat)/[2020] 80 GST 446 (Gujarat)/[2020] 39 GSTL 14 (Gujarat)[22-06-2020], the validity of Rule 142(1)(a)—specifically the part that refers to notices under Section 122—was challenged.

The Hon’ble Gujarat High Court upheld the validity of Rule 142(1)(a) and observed that it was not in conflict with any provision of the CGST Act.

However, when viewed from a structural and scheme-based perspective, certain aspects were arguably not examined in depth:

  • The absence of any independent adjudicatory machinery or prescribed procedure within Section 122 itself;
  • The role and impact of Section 127, which was not specifically canvassed before the Court;
  • Whether a Rule can be relied upon to infer that the legislature intended Section 122 to function as an independent proceeding section, despite silence in the main provision on notice, officer, and procedure.

From a broader doctrinal standpoint, one may therefore still debate whether Rule 142(1)(a) can be treated as conclusive proof that Section 122 is meant to operate standalone.

4. Sections 122 to 125 – Penalty Without Machinery

4.1 Structural Analysis of Sections 122–125

A close reading of Sections 122, 123, 124 and 125 reveals that these provisions:

  • define various contraventions and defaults,
  • prescribe the quantum of penalty or upper limits, but
  • do not:
    • identify any Proper Officer for adjudication,
    • provide for issuance of show cause notice,
    • lay down any procedure for hearing or determining liability, or
    • specify any time limits for initiation or completion.

In contrast, other provisions such as:

  • Section 62, Section 63, Section 64,
  • Section 73, Section 74, Section 74A,
  • Section 76, Section 129, and Section 130

explicitly set out: